E-commerce: The benefits and hidden dangers for an independent retailer

Over the past year, repeated lockdowns and tiered restrictions have forced retailers to close their premises and halt trading. Customers have had little choice but to do more of their shopping online. For independent retailers, e-commerce could provide an opportunity to take advantage of recent shifts in shopping behaviour and generate revenue through the pandemic. However, it is crucial that a carefully considered plan is in place. The pandemic has undoubtedly had a major impact on the way people shop. Many larger retailers have reported significant online growth, including John Lewis, which in 2020, saw an 84% increase in online sales year-on-year from mid-March. However, due to smaller overhead costs and access to government support schemes, a recent report from Local Data Company (LDC), concluded that independent retailers are more agile and resilient than their larger counterparts. Data shows that larger chains saw a net fall of 6,000 stores in the first half of last year, compared to only 1,833 small and independent high street stores. Some independent retailers are not faring as well as others however. For those operating from premises at transport hubs, such as train stations, or city centre locations where footfall has dropped off significantly, trading conditions have been extremely challenging throughout the pandemic. Even those situated on thriving local high streets have found it hard to turn a profit, due to the stop-start nature of trading conditions over the past year. Instead of waiting for restrictions to lift and trading conditions to improve, some independent retailers are looking for ways to transform their business model and start trading online. Although setting up an e-commerce platform would open up a new revenue stream, it does require significant up-front investment. Whether these funds are sourced from cash reserves, unspent loan finance or a bank loan, it is important to be aware when any repayments will fall due and the implications this could have on cashflow. A three-way cashflow forecast could offer better financial insights and add value to the business, which could be particularly helpful if approaching the bank for a loan. Here are some other factors that independent retailers should consider when first setting up an e-commerce platform for the first time: Have an e-commerce business plan It is vital that businesses looking to start trading online, get the foundations right. Although a business plan is likely already in place, a new one will be needed if the business is making a major change to its operating model. Advance planning will help to clarify an e-commerce strategy and identify potential risks. It also gives business owners a better understanding of where demand exists and for which products. Decide on a route to market Online marketplaces such as Amazon and Ebay continue to grow in popularity as they simplify the shopping experience for customers. However, using an online marketplace might not be suitable for every independent retailer. Things to factor in when deciding on a route to market are the type of products being sold, projected sales volumes and the delivery model. If the business chooses to develop its own e-commerce website, there are important on-costs to consider. For example, budget should be set aside for marketing and search engine optimisation (SEO) to ensure the website is easy to find in online search results. Aside from the cost of creating an e-commerce platform, other costs to consider are secure payment protection, data protection, business permits and cyber insurance. These will vary for each business, but it is important to invest properly in these areas early on, to avoid unexpected bills down the line. Know your margins Access to clear and accurate financial reports and forecasts will make it easier for business owners to decide whether trading online is viable. Careful consideration should be given to analysing the most profitable products and setting pricing levels that are both competitive and deliver sufficient margin. These products should be promoted on the website to drive sales. If goods are being sourced from the EU, it is important to bear in mind that additional VAT liabilities and tariffs may be incurred and the business may need to consider whether these additional costs will be passed on to the customer or not. Thinking of trading overseas? Creating an e-commerce platform could open the door to an entirely new market overseas. However, it is important to be aware of the risks associated with exporting goods. For example, UK businesses seeking to trade in the EU will need to comply with new VAT and rules of origin regulations. To understand whether such costs are worthwhile, businesses should consider the volume of export sales and whether they could pass the additional costs on to the customer or include them in the price of the item. It is vital to obtain expert advice about the potential costs and risks associated with trading overseas. Make use of data-based insights Setting up an e-commerce platform requires significant investment and planning. However, unlike physical stores, online trading allows retailers to track customers’ preferences and monitor shopping behaviour. Access to such data analytics can help to inform strategic decisions and support the growth of the business. Looking ahead to the post-pandemic future, it is highly likely that many consumers will continue to do much of their shopping online. Physical stores will continue to attract visitors, but they will need to focus on showcasing goods and developing a more experiential proposition. While it requires care and planning, establishing an e-commerce platform now could help smaller retailers to future-proof their businesses and generate significant value in the long term. Roberto Lobue is a partner and Martin Hamilton is a retail sector specialist at accountancy firm, Menzies LLP.

E-commerce: The benefits and hidden dangers for an independent retailer

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